Hopes the euro zone might emerge from recession soon were dealt a blow on Thursday, as surveys showed the downturn in the region's businesses worsened unexpectedly this month – especially in France.
Economists had expected that Thursday's Flash Eurozone Services PMI, a business survey and one of the earliest monthly indicators of economic activity, would add to tentative signs that a recovery is in the offing.
But the indicator fell in February to 47.3 from 48.6, marking a year below the 50 threshold for growth and confounding expectations for a rise to 49.0 from more than 30 analysts polled by Reuters, none of whom forecast such a poor reading.
PMI compiler Markit said the schism between Germany and France – the two biggest economies in the euro zone – is now at its widest since the survey started in 1998.
While firms in Germany sustained a healthy rate of growth, French services companies are in the midst of their worst slump since the nadir of the Great Recession in early 2009.
"If it wasn't for Germany, these would be really dire readings. At least the German economy is still helping to keep the euro zone afloat in some respects," said Chris Williamson, chief economist at Markit.
He said the latest PMIs pointed to the euro zone economy shrinking 0.2-0.3 per cent in the first quarter, following an estimated 0.4 per cent contraction at the end of last year.
That's gloomier than last week's Reuters poll of economists, which suggested the economy will merely stagnate this quarter.
By far the most worrying aspect of Thursday's PMIs was the dismal performance of French companies.
Williamson said the data for France were more befitting of a struggling "peripheral" euro zone economy like Spain or Italy, rather than the "core" status it traditionally shares with Germany.
By contrast, Germany has enjoyed a good start to the year.
German investor morale soared to its highest level in nearly three years this month, while the statistics office said on Tuesday that employment hit its highest level since reunification in the fourth quarter.
Still, there are limits to what German prosperity can do for the rest of the region, blighted by harsh budget austerity and rising joblessness.
The latest PMIs suggest that the "positive contagion" noted by European Central Bank President Mario Draghi in January may be more in hope than expectation.
New orders at euro zone service sector firms – which include banks, IT companies, hotels and restaurants – declined at a faster rate this month, with the index sinking sharply to 46.0 from 48.4 in January.
That bodes poorly for next month's services PMI.
Thursday's PMIs also dashed optimism that the slump in euro zone factories would ease further in February, as the manufacturing index barely moved, to 47.8 from 47.9 in January.
Output fell at a faster rate, although new export orders brought at least a glimmer of hope, as the index rose to 51.7 in February from 49.5 – its first above-50 reading since June 2011.
The composite PMI, which combines both the services and manufacturing surveys, fell to 47.3 in February from 48.6.
Companies cut more jobs, although not as quickly as in January, when layoffs rose at the fastest pace in more than three years.